Bellevue’s Star Continues to Shine, and Leasing Activity Picks Up

Leasing activity for the first two quarters of this year in Bellevue, Seattle’s largest satellite city, is often viewed in relation to its larger neighbor across the lake. Bellevue has not been experiencing the same success as Seattle’s submarkets—especially the South Lake Union District, where Amazon currently sits on 9 million square feet of space and where Facebook plans its expansion to Dexter Station. A distinct shortage of space in downtown Bellevue over the last several years has been a significant problem for companies looking to locate there, according to Chris Hughes, managing director at JLL. “Bellevue has had no space for the last few years, it has seen single-digit vacancy rates. The growth on the east side has been difficult for companies looking for space.”

Due to this lack of property in Bellevue, several companies view Seattle as a more viable option. “There’s certainly a draw to Seattle. The amenities are there, the big companies are there, and the labor is there,” Hughes added. The gravitation away from downtown Bellevue is becoming increasingly frequent. Google is expanding its Kirkland Campus —located at 747 6th Street in Kirkland, several miles north of Bellevue—to hire 1,000 more employees. In early April of 2015, Expedia announced that it will be vacating its downtown Bellevue office and relocating to the Amgen campus overlooking Elliott Bay in Seattle (the company agreed to purchase the property for $228.9 million). Worryingly for Bellevue, its downtown office market could be negatively impacted by companies’ draw to Seattle as a more attractive alternative.

In the long-term, I think Bellevue offers opportunities that Seattle might not.

Leasing activity in Bellevue-Seattle for the first two quarters hasn’t only been driven by the interplay between the two regions: smaller startup tech companies are also looking at the footprints made by the larger, more established tech companies in the area as they consider new lease deals. “There’s so much tech talent available on the east side because of these larger companies. A lot of these employees [at startups] worked at Microsoft or Amazon at some point in time. That’s definitely a driver,” Bill Cooper, vice president at Colliers Bellevue, said. The footprint left by Amazon, specifically, is still influencing Bellevue’s commercial market, according to Jeff Chaney, senior vice president of Kidder Mathews’ Bellevue office. “[Bellevue’s] market that was once driven significantly by Microsoft is now being driven by other tech companies that have expanded their presence significantly…we’ve historically had satellite offices here that have supported Microsoft. Now we’re starting to see some of the newer technology players not only having an office here, but also expanding their presence up here in this market.”

From a commercial real estate perspective, many feel that the shortage of space in Bellevue—and companies’ subsequent relocation westward across Lake Washington—is a detriment to its local market. Some, however, view the lack of space as a unique prospect for Seattle’s neighboring city. “In the long-term, I think Bellevue offers opportunities that Seattle might not. Going forward, as Microsoft reduces its footprint in downtown Bellevue and as Expedia vacates their Bellevue headquarters, I think that will create opportunity in Bellevue that may not exist in Seattle,” Chaney of Kidder Mathews said. Because the larger tech companies often gravitate toward the busier, more robust Seattle market—the CBD and South Lake Union submarkets have been especially active—more space is freed up in Bellevue. The respective vacancy rates in Seattle and Bellevue also indicate the present strength of Bellevue’s market, according to Cooper of Colliers. “The vacancy rate for Class A buildings in Bellevue is 7.4 percent. Right now, in today’s terms, Bellevue’s [market] is stronger,” he said. In 2010, Bellevue’s downtown vacancy rate was 13.2 percent, a figure that has dropped considerably over the last five years.

Colliers’ Research Report analyzed the respective asking rental rates for the first quarter for Class A and Class B space and perhaps also reaffirms the current desirability of Bellevue’s CBD over Seattle’s. Bellevue’s overall Class A rental rate was $37.80 and Seattle’s overall rate was $36.87. For Class B buildings, Bellevue’s overall rate was $31.73 and Seattle’s was $29.93. That Bellevue’s asking rents have increased from the fourth quarter of last year and the vacancy rate has steadily declined suggests a positive forecast for the local market.

Although many of the headline deals have focused on how the larger tech companies gravitate towards Seattle’s downtown, Bellevue’s downtown market is experiencing some of its own success in the leasing industry: Microsoft and the University of Washington’s joint venture, Global Innovation Exchange (GIX), will be the first tenant of Bellevue’s 36-acre Spring District. GIX’s new home will open officially in 2017. While there’s certainly an argument to be made for the current strength of Bellevue in relation to Seattle’s submarkets, there are also several factors that continually influence potential tenants’ decisions regarding whether or not to occupy a space.

A large focus of all of the major companies is the need to satisfy their employees. “Employee costs are typically around 80 percent of their balance sheet whereas the real estate cost is closer to 20 percent. Companies are willing to spend more money to keep their employees happy and be in these urban environments and provide not only amenities, but also transportation hubs and living opportunities,” Hughes of JLL said. As well as these other considerations, such as amenities and access to transportation for employees, access to labor and quality-of-life issues are factors that all of these companies consider, regardless of their individual business strategy.

According to Jeff Huntington, first vice president of Kidder Mathews Seattle, the urban lifestyle of Seattle might appeal more to prospective employees—and thus potential tenants—than the suburban feel of Bellevue. “As far as quality-of-life, Seattle is more hip and chic than Bellevue, and the millennials like the urban living. In a lot of the companies’ minds, you need to be in Seattle rather than Bellevue to attract and retain the employees that you want,” Huntington said. From a recruitment and employment standpoint, the attraction of Seattle’s downtown district—and its various submarkets—does not go unnoticed by potential tenants.

While it is clear that the Seattle and Bellevue commercial markets have experienced varying degrees of success over the last two quarters due to a multitude of different factors, it is difficult to predict what the third and fourth quarter results will reveal about the trajectories of the respective markets. Currently, however, the outlook is positive for both.

“We’ve seen growth, not just organically but regionally, within Seattle and Bellevue, which have hit the radar as [two] of the nation’s major tech hubs,” Hughes of JLL said. Over this summer, the two regions can hope to expect more of the successful trend that they’ve been experiencing throughout the first two quarters, according to David Abbott of Colliers Seattle. “When there’s a rising tide across the entire market, it’s certainly has a positive impact. Looking forward, over the summer, I think there’s going to be a handful of sizable deals that are announced.”